What changed in this filing

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Item 1. Financial Statements

2021-02-01 compared with 2020-10-30 · 204 added, 203 removed, 492 unchanged (45% of the section changed)

4 unchanged sentences

(In millions, except per share amounts)

Three Months Ended

September 30,

Three Months Ended Six Months Ended

December 31, December 31,

2020 2019 2020 2019

Revenues, other than interest on funds held

19 unchanged sentences

Diluted weighted average shares outstanding 429.0 433.3 429.5 434.3

(A) Professional Employer Organization (“PEO”) revenues are net of direct pass-through costs, primarily consisting of payroll wages and payroll taxes of $ 10,925.8 million and $ 10,510.6 million for the three months ended September 30, 2020 and 2019, respectively.

(A) Professional Employer Organization (“PEO”) revenues are net of direct pass-through costs, primarily consisting of payroll wages and payroll taxes of $ 13,349.1 million and $ 12,371.6 million for the three months ended December 31, 2020 and 2019, respectively, and $ 24,364.9 million and $ 22,882.2 million for the six months ended December 31, 2020 and 2019, respectively.

See notes to the Consolidated Financial Statements.

3 unchanged sentences

(In millions)

Three Months Ended

September 30,

Three Months Ended Six Months Ended

December 31, December 31,

2020 2019 2020 2019

Net earnings $ 647.5 $ 651.6 $ 1,249.6 $ 1,234.0

1 unchanged sentence

Currency translation adjustments 61.9 34.3 112.3 ( 14.6 )

Unrealized net gains/(losses) on available-for-sale securities ( 24.6 ) 96.1

Unrealized net (losses)/gains on available-for-sale securities ( 44.1 ) ( 35.5 ) ( 68.7 ) 60.6

Tax effect 10.0 7.5 15.5 ( 13.3 )

Reclassification of net (gain)/losses on available-for-sale securities to net earnings ( 0.3 ) ( 2.3 )

Reclassification of net (gains)/losses on available-for-sale securities to net earnings ( 7.7 ) ( 7.1 ) ( 8.0 ) ( 9.4 )

Tax effect 1.7 1.6 1.8 2.1

Unrealized loss on cash flow hedging activities ( 3.3 ) —

Unrealized (losses)/gains on cash flow hedging activities — 0.7 ( 3.3 ) 0.7

Tax effect — ( 0.2 ) 0.8 ( 0.2 )

Amortization of unrealized loss on cash flow hedging activities 0.6 —

Amortization of unrealized losses on cash flow hedging activities 1.1 — 1.7 —

Tax effect ( 0.4 ) — ( 0.4 ) —

8 unchanged sentences

(In millions, except per share amounts)

September 30, June 30,

December 31, June 30,

Current assets:

35 unchanged sentences

Stockholders' equity:

Preferred stock, $ 1.00 par value:

Preferred stoc k, $ 1.00 par value:

authorized, 0.3 shares;

2 unchanged sentences

authorized, 1,000.0 shares;

issued, 638.7 shares at September 30, 2020 and June 30, 2020;

outstanding, 429.3 and 429.9 shares at September 30, 2020 and June 30, 2020, respectively

issued, 638.7 shares at December 31, 2020 and June 30, 2020;

outstanding, 428.1 and 429.9 shares at December 31, 2020 and June 30, 2020, respectively

Capital in excess of par value 1,407.6 1,333.8

1 unchanged sentence

Treasury stock - at cost:

209.4 and 208.9 shares at September 30, 2020 and June 30, 2020, respectively

210.6 and 208.9 shares at December 31, 2020 and June 30, 2020, respectively

( 14,505.4 ) ( 14,067.0 )

8 unchanged sentences

(In millions)

Three Months Ended

September 30,

Six Months Ended

Cash Flows from Operating Activities:

13 unchanged sentences

Increase in other assets ( 643.3 ) ( 605.4 )

Increase/(Decrease) in accounts payable 5.7 ( 15.1 )

Increase in accounts payable 10.2 12.3

Decrease in accrued expenses and other liabilities ( 158.9 ) ( 149.8 )

6 unchanged sentences

Proceeds from sale of property, plant, and equipment and other assets 1.8 23.6

Net cash flows provided by investing activities 264.2 122.2

Net cash flows used in investing activities ( 949.6 ) ( 124.9 )

Cash Flows from Financing Activities:

Net increase/(decrease) in client funds obligations 3,203.3 ( 8,063.3 )

Net increase in client funds obligations 10,036.4 7,093.7

Payments of debt ( 1,001.1 ) ( 1.1 )

4 unchanged sentences

Dividends paid ( 781.7 ) ( 686.0 )

Net (payments)/proceeds related to reverse repurchase agreements ( 13.6 ) 166.3

Net proceeds of commercial paper borrowings — 3,536.7

Net cash flows provided by/(used in) financing activities 2,524.1 ( 5,045.9 )

Net payments related to reverse repurchase agreements ( 13.6 ) ( 262.0 )

Net cash flows provided by financing activities 8,751.5 5,525.1

Effect of exchange rate changes on cash, cash equivalents, restricted cash, and restricted cash equivalents 84.7 ( 12.2 )

29 unchanged sentences

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020 (“fiscal 2020”).

Certain amounts from the prior year's financial statements have been reclassified in order to conform to the current year's

presentation.

New Accounting Pronouncements

6 unchanged sentences

Recently Issued Accounting Pronouncements

The following table summarizes recent ASU's issued by the Financial Accounting Standards Board (“FASB”) that could have a material impact on the Company's consolidated results of operations, financial condition, or cash flows.

The following table summarizes recent ASU's issued by the Financial Accounting Standards Board (“FASB”) which have been assessed and are applicable to the Company:

Standard Description Effective Date Effect on Financial Statements or Other Significant Matters

7 unchanged sentences

The Company believes these revenue categories depict how the nature, amount, timing, and uncertainty of its revenue and cash flows are affected by economic factors.

HCM provides a suite of product offerings that assist employers of all types and sizes in all stages of the employment cycle, from recruitment to retirement.

Global is generally consistent with the types of services provided within HCM but represents geographies outside of the United States and includes our multinational offerings.

HCM and Global revenues are primarily attributable to fees for providing solutions for payroll, benefits, talent, retirement services and HR processing and fees charged to implement the Company's solutions for clients.

HRO provides a comprehensive human resources outsourcing solution, including offering benefits, providing workers’ compensation insurance, and administering state unemployment insurance, among other human resources functions.

This revenue is primarily driven by the PEO.

Amounts collected from PEO worksite employers include payroll, fees for benefits, and an administrative fee that also includes payroll taxes, fees for workers’ compensation and state unemployment taxes.

The payroll and payroll taxes collected from the worksite employers are presented in revenue net, as the Company does not retain risk and acts as an agent with respect to this aspect of the PEO arrangement.

With respect to the payroll and payroll taxes, the worksite employer is primarily responsible for providing the service and has discretion in establishing wages.

The fees collected from the worksite employers for benefits (i.e., PEO benefits pass-throughs), workers’ compensation and state unemployment taxes are presented in revenues and the associated costs of benefits, workers’ compensation and state unemployment taxes are included in operating expenses, as the Company acts as a principal with respect to this aspect of the arrangement.

With respect to these fees, the Company is primarily responsible for fulfilling the service and has discretion in establishing price.

The Company has further disaggregated HRO to separate out its PEO zero-margin benefits pass-through revenues.

The Company recognizes client funds interest revenues on collected but not yet remitted funds held for clients in revenues as earned, as the collection, holding and remittance of these funds are critical components of providing these services.

The following tables provide details of revenue by our strategic pillars with disaggregation for PEO zero-margin benefits pass-throughs and client funds interest, and include a reconciliation to the Company’s reportable segments:

Three Months Ended

September 30,

The following tables provide details of revenue by our strategic pillars, and include a reconciliation to the Company’s reportable segments:

Three Months Ended Six Months Ended

December 31, December 31,

Types of Revenues 2020 2019 2020 2019

5 unchanged sentences

Total Revenues $ 3,695.7 $ 3,669.5 $ 7,166.5 $ 7,165.2

Reconciliation of disaggregated revenue to our reportable segments for the three months ended September 30, 2020:

Reconciliation of disaggregated revenue to our reportable segments for the three months ended December 31, 2020:

Types of Revenues Employer Services PEO Other Total

5 unchanged sentences

Total Segment Revenues $ 2,510.6 $ 1,186.1 $ ( 1.0 ) $ 3,695.7

Reconciliation of disaggregated revenue to our reportable segments for the three months ended September 30, 2019:

Reconciliation of disaggregated revenue to our reportable segments for the three months ended December 31, 2019:

Types of Revenues Employer Services PEO Other Total

5 unchanged sentences

Total Segment Revenues $ 2,537.5 $ 1,134.7 $ ( 2.7 ) $ 3,669.5

Reconciliation of disaggregated revenue to our reportable segments for the six months ended December 31, 2020:

Types of Revenues Employer Services PEO Other Total

HCM $ 3,157.4 $ — $ ( 2.0 ) $ 3,155.4

HRO, excluding PEO zero-margin benefits pass-throughs 479.3 772.7 ( 0.9 ) 1,251.1

PEO zero-margin benefits pass-throughs — 1,507.0 — 1,507.0

Global 1,041.1 — — 1,041.1

Interest on funds held for clients 209.6 2.3 — 211.9

Total Segment Revenues $ 4,887.4 $ 2,282.0 $ ( 2.9 ) $ 7,166.5

Reconciliation of disaggregated revenue to our reportable segments for the six months ended December 31, 2019:

Types of Revenues Employer Services PEO Other Total

HCM $ 3,219.8 $ — $ ( 3.3 ) $ 3,216.5

HRO, excluding PEO zero-margin benefits pass-throughs 475.6 767.5 ( 1.9 ) 1,241.2

PEO zero-margin benefits pass-throughs — 1,421.5 — 1,421.5

Global 1,014.5 — — 1,014.5

Interest on funds held for clients 269.0 2.5 — 271.5

Total Segment Revenues $ 4,978.9 $ 2,191.5 $ ( 5.2 ) $ 7,165.2

Contract Balances

1 unchanged sentence

Therefore, the Company does not recognize a contract asset or liability resulting from the timing of revenue recognition and invoicing.

Changes in deferred revenue related to set up fees for the three months ended September 30, 2020 were as follows:

Changes in deferred revenue related to set up fees for the six months ended December 31, 2020 were as follows:

Contract Liability

3 unchanged sentences

Currency translation adjustments 20.6

Contract liability, September 30, 2020 $ 525.8

Contract liability, December 31, 2020 $ 521.6

Earnings per Share (“EPS”)

1 unchanged sentence

Shares Diluted

Three Months Ended September 30, 2020

Three Months Ended December 31, 2020

Net earnings $ 647.5 $ 647.5

1 unchanged sentence

EPS $ 1.51 $ 1.51

Three Months Ended September 30, 2019

Three Months Ended December 31, 2019

Net earnings $ 651.6 $ 651.6

1 unchanged sentence

EPS $ 1.51 $ 1.50

Options to purchase 2.1 million and 0.7 million shares of common stock for the three months ended September 30, 2020 and 2019, respectively, were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.

Six Months Ended December 31, 2020

Net earnings $ 1,249.6 $ 1,249.6

Weighted average shares (in millions) 428.0 0.7 0.8 429.5

EPS $ 2.92 $ 2.91

Six Months Ended December 31, 2019

Net earnings $ 1,234.0 $ 1,234.0

Weighted average shares (in millions) 432.1 1.1 1.1 434.3

EPS $ 2.86 $ 2.84

Options to purchase 1.2 million and 1.3 million shares of common stock for the three months ended December 31, 2020 and 2019, respectively, and 1.8 million and 1.0 million shares of common stock for the six months ended December 31, 2020 and 2019, respectively, were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.

Other (Income)/Expense, Net

Three Months Ended

September 30,

Three Months Ended Six Months Ended

December 31, December 31,

2020 2019 2020 2019

Interest income on corporate funds $ ( 10.4 ) $ ( 25.7 ) $ ( 24.3 ) $ ( 58.0 )

4 unchanged sentences

Other (income)/expense, net $ ( 29.0 ) $ ( 46.0 ) $ ( 54.0 ) $ ( 100.6 )

In fiscal 2021, the Company recorded impairment charges of $ 2.8 million as a r esult of recognizing certain owned facilities at fair value given intent to sell and accordingly classified as held for sale.

Other (income)/expense, net, decreased for the three and six months ended December 31, 2020 primarily as a result of a decrease in interest income on corporate funds due to lower interest rates earned.

Corporate Investments and Funds Held for Clients

Corporate investments and funds held for clients at September 30, 2020 and June 30, 2020 were as follows:

September 30, 2020

Corporate investments and funds held for clients at December 31, 2020 and June 30, 2020 were as follows:

December 31, 2020

Losses Fair Market Value (A)

35 unchanged sentences

The Company concurred with and did not adjust the prices obtained from the independent pricing service.

The Company had no available-for-sale securities included in Level 1 or Level 3 at September 30, 2020.

The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of September 30, 2020, are as follows:

September 30, 2020

The Company had no available-for-sale securities included in Level 1 or Level 3 at December 31, 2020.

The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of December 31, 2020, are as follows:

December 31, 2020

Securities in Unrealized Loss Position Less Than 12 Months Securities in Unrealized Loss Position Greater Than 12 Months Total

6 unchanged sentences

Canadian government obligations and Canadian government agency obligations

( 0.1 ) 68.1 — — ( 0.1 ) 68.1

Commercial mortgage-backed securities — — — 1.4 — 1.4

16 unchanged sentences

$ ( 0.7 ) $ 63.0 $ — $ 1.5 $ ( 0.7 ) $ 64.5

At September 30, 2020, Corporate bonds include investment-grade debt securities with a wide variety of issuers, industries, and sectors, primarily carry credit ratings of A and above, and have maturities ranging from October 2020 through September 2030 .

At September 30, 2020, asset-backed securities include AAA-rated senior tranches of securities with predominantly prime collateral of fixed-rate auto loan, credit card, equipment lease, and rate reduction receivables with fair values of $ 1,520.8 million, $ 1,100.4 million, $ 321.9 million, and $ 97.1 million, respectively.

These securities are collateralized by the cash flows

of the underlying pools of receivables.

At December 31, 2020, Corporate bonds include investment-grade debt securities with a wide variety of issuers, industries, and sectors, primarily carry credit ratings of A and above, and have maturities ran g ing from January 2021 through October 2030.

At December 31, 2020, asset-backed securities include AAA-rated senior tranches of securities with predominantly prime collateral of fixed-rate auto loan, credit card, equipment lease, and rate reduction receivables with fair values of $ 1,478.7 million, $ 965.8 million, $ 302.8 million, and $ 80.8 million, respectively.

These securities are collateralized by the cash flows of the underlying pools of receivables.

The primary risk associated with these securities is the collection risk of the underlying receivables.

All collateral on such asset-backed securities has performed as expected through September 30, 2020.

At September 30, 2020, U.S.

All collateral on such asset-backed securities has performed as expected through December 31, 2020.

At December 31, 2020, U.S.

government agency securities primarily include debt directly issued by Federal Farm Credit Banks and Federal Home Loan Banks with fair values of $ 679.4 million and $ 584.7 million, respectively.

government agency securities represent senior, unsecured, non-callable debt that primarily carry ratings of Aaa by Moody's, and AA+ by Standard & Poor's, with maturities ranging from October 2020 through December 2029 .

At September 30, 2020, other securities and their fair value primarily include municipal bonds of $ 576.7 million, AA-rated United Kingdom Gilt securities of $ 197.3 million, and AAA-rated and AA-rated sovereign bonds of $ 77.2 million.

At December 31, 2020, U.S government agency commercial mortgage-backed securities of $ 860.4 million include those issued by Federal Home Loan Mortgage Corporation and Federal National Mortgage Association.

At December 31, 2020, other securities primarily include municipal bonds, diversified with a variety of issuers, with credit ratings of A and above with fair values of $ 560.7 million and AA-rated United Kingdom Gilt securities of $ 208.3 million.

Classification of corporate investments on the Consolidated Balance Sheets is as follows:

September 30, June 30,

December 31, June 30,

Corporate investments:

7 unchanged sentences

Funds held for clients have been invested in the following categories:

September 30, June 30,

December 31, June 30,

Funds held for clients:

5 unchanged sentences

The client funds obligations represent liabilities that will be repaid within one year of the balance sheet date.

The Company has reported client funds obligations as a current liability on the Consolidated Balance Sheets totaling $ 29,098.4 million and $ 25,831.6 million at September 30, 2020 and June 30, 2020, respectively.

The Company has classified funds held for clients as a current asset since these funds are held solely for the purpose of satisfying the client funds obligations.

Of the Company’s funds held for clients at September 30, 2020 and June 30, 2020, $ 26,805.6 million and $ 23,740.0 million, respectively, are held in the grantor trust.

The Company has reported client funds obligations as a current liability on the Consolidated Balance Shee ts totaling $ 36,066.1 million and $ 25,831.6 million at December 31, 2020 and June 30, 2020, respectively.

The Company h as classified funds held for clients as a current asset since these funds are held solely for the purpose of satisfying the client funds obligations.

Of the Company’s funds held for clients at December 31, 2020 and June 30, 2020 , $ 33,706.4 million an d $ 23,740.0 million, respectively, are held in the grantor trust.

The liabilities held within the trust are intercompany liabilities to other Company subsidiaries and are eliminated in consolidation.

2 unchanged sentences

These amounts have been reconciled to the Consolidated Balance Sheets on the Statements of Consolidated Cash Flows.

The Company has reported the cash flows related to the cash received from and paid on behalf of clients on a net basis within net increase / (decrease) in client funds obligations in the financing activities section of the Statements of Consolidated Cash Flows.

Approximately 79 % of the available-for-sale securities held a AAA-rating or AA-rating at September 30, 2020, as rated by Moody's, Standard & Poor's, DBRS for Canadian dollar-denominated securities, and Fitch for asset-backed and commercial mortgage-backed securities.

All available-for-sale securities were rated as investment grade at September 30, 2020.

Expected maturities of available-for-sale securities at September 30, 2020 are as follows:

The Company has reported the cash flows related to the cash

received from and paid on behalf of clients on a net basis within net increase / (decrease) in client funds obligations in the financing activities section of the Statements of Consolidated Cash Flows.

Approximately 77 % of the available-for-sale securities held a AAA-rating or AA-rating at December 31, 2020, as rated by Moody's, Standard & Poor's, DBRS for Canadian dollar-denominated securities, and Fitch for asset-backed and commercial mortgage-backed securities.

All available-for-sale securities were rated as investment grade at December 31, 2020.

Expected maturities of available-for-sale securities at December 31, 2020 are as follows:

One year or less $ 4,778.9

5 unchanged sentences

The Company records leases on the consolidated balance sheets as operating lease right-of-use (“ROU”) assets, records the current portion of operating lease liabilities within accrued expenses and other current liabilities and, separately, records long-term operating lease liabilities.

The difference between total ROU assets and total lease liabilities are primarily attributable to pre-payments of our obligations and the recognition of various lease incentives.

The Company has entered into operating lease agreements for facilities and equipment.

The Company's leases have remaining lease terms of up to approximately eleven years .

Operating lease ROU assets and operating lease liabilities are recognized at the lease commencement date based on the present value of the lease payments over the lease term.

The lease liabilities are measured by discounting future lease payments at the Company’s collateralized incremental borrowing rate for financing instruments of a similar term, unless the implicit rate is readily determinable.

ROU assets also include adjustments related to prepaid or deferred lease payments and lease incentives.

The difference between total ROU assets and total lease liabilities are primarily attributable to pre-payments of our obligations and the recognition of various lease incentives.

The components of operating lease expense were as follows:

Three Months Ended

September 30,

Three Months Ended Six Months Ended

December 31, December 31,

2020 2019 2020 2019

Operating lease cost $ 40.0 $ 42.3 $ 79.1 $ 86.5

3 unchanged sentences

The following table provides supplemental cash flow information related to the Company's leases:

Three Months Ended

September 30,

Six Months Ended

Cash paid for operating lease liabilities $ 77.0 $ 75.8

1 unchanged sentence

Other information related to our operating lease liabilities is as follows:

September 30, June 30,

December 31, June 30,

Weighted-average remaining lease term (in years) 6 6

Weighted-average discount rate 2.1 % 2.3 %

As of September 30, 2020, maturities of operating lease liabilities are as follows:

Nine months ending June 30, 2021 $ 77.8

Current operating lease liability $ 97.4 $ 95.5

As of December 31, 2020, maturities of operating lease liabilities are as follows:

Six months ending June 30, 2021 $ 52.9

Twelve months ending June 30, 2022 100.5

6 unchanged sentences

Net lease obligations $ 454.8

Current operating lease liabilities were approximately $ 94.7 million and $ 95.5 million as of September 30, 2020 and June 30, 2020, respectively, and are included within Accrued expenses and other current liabilities on the Consolidated Balance Sheets.

Goodwill and Intangible Assets, net

Changes in goodwill for the three months ended September 30, 2020 are as follows:

Changes in goodwill for the six months ended December 31, 2020 are as follows:

Services Total

2 unchanged sentences

Currency translation adjustments 37.2 — 37.2

Balance at September 30, 2020 $ 2,321.5 $ 4.8 $ 2,326.3

Balance at December 31, 2020 $ 2,341.8 $ 4.8 $ 2,346.6

Components of intangible assets, net, are as follows:

September 30, June 30,

December 31, June 30,

Intangible assets:

12 unchanged sentences

The weighted average remaining useful life of the intangible assets is 6 years ( 6 years for software and software licenses, 5 years for customer contracts and lists, and 3 years for other intangibles).

Amortization of intangible assets was $ 84.2 million and $ 69.4 million for the three months ended September 30, 2020 and 2019, respectively.

Amortization of intangible assets was $ 80.8 million and $ 69.7 million for the three months ended December 31, 2020 and 2019, respectively, and $ 165.0 million and $ 139.1 million for the six months ended December 31, 2020 and 2019, respectively.

Estimated future amortization expenses of the Company's existing intangible assets are as follows:

Nine months ending June 30, 2021 $ 232.1

Six months ending June 30, 2021 $ 157.0

Twelve months ending June 30, 2022 $ 270.2

10 unchanged sentences

The primary uses of the credit facilities are to provide liquidity to the commercial paper program and funding for general corporate purposes, if necessary.

The Company had no borrowings through September 30, 2020 under the credit agreements.

The Company had no borrowings through December 31, 2020 under the credit agreements.

The Company's U.S.

1 unchanged sentence

This commercial paper program provides for the issuance of up to $ 9.7 billion in aggregate maturity value.

The Company’s commercial paper program is rated A-1+ by Standard & Poor’s and Prime-1 (“P-1”) by Moody’s.

The Company’s commercial paper program is rated A-1+ by Standard & Poor’s, Prime-1 (“P-1”) by Moody’s and F1+ by Fitch.

These ratings denote the highest quality commercial paper securities.

Maturities of commercial paper can range from overnight to up to 364 days.

At September 30, 2020 and June 30, 2020, the Company had no commercial paper borrowing outstanding.

At December 31, 2020 and June 30, 2020, the Company had no commercial paper borrowing outstanding.

Details of the borrowings under the commercial paper program are as follows:

Three Months Ended

September 30,

Three Months Ended Six Months Ended

December 31, December 31,

2020 2019 2020 2019

Average daily borrowings (in billions) $ 1.8 $ 3.5 $ 2.1 $ 3.7

Weighted average interest rates 0.1 % 1.7 % 0.1 % 2.0 %

Weighted average maturity (approximately in days) 1 day 2 days

Weighted average maturity (approximately in days) 1 day 2 days 1 day 2 days

The Company’s U.S., Canadian and United Kingdom short-term funding requirements related to client funds obligations are sometimes obtained on a secured basis through the use of reverse repurchase agreements, which are collateralized principally by government and government agency securities, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities.

These agreements generally have terms ranging from overnight to up to five business days.

At September 30, 2020, there were no outstanding obligations related to reverse repurchase agreements.

At December 31, 2020, there were no outstanding obligations related to reverse repurchase agreements.

At June 30, 2020, the Company had $ 13.6 million of outstanding obligations related to the reverse repurchase agreements.

Details of the reverse repurchase agreements are as follows:

Three Months Ended

September 30,

Three Months Ended Six Months Ended

December 31, December 31,

2020 2019 2020 2019

Average outstanding balances $ 83.2 $ 335.9 $ 117.8 $ 381.2

6 unchanged sentences

Since these derivative contracts were classified as cash flow hedges, the unamortized loss of $ 43.6 million was deferred in accumulated other comprehensive income and will be amortized to earnings over the life of the Notes as the interest payments are made.

The principal amounts and associated effective interest rates of the Notes and other debt as of September 30, 2020 and June 30, 2020, are as follows:

Debt instrument Effective Interest Rate September 30, 2020 June 30, 2020

The principal amounts and associated effective interest rates of the Notes and other debt as of December 31, 2020 and June 30, 2020, are as follows:

Debt instrument Effective Interest Rate December 31, 2020 June 30, 2020

Fixed-rate 2.250 % notes due September 15, 2020

9 unchanged sentences

Total long-term debt $ 1,994.1 $ 1,002.8

(a) - Current portion of long-term debt as of September 30, 2020 is included within Accrued expenses and other current liabilities on the Consolidated Balance Sheets.

(a) - Current portion of long-term debt as of December 31, 2020 is included within Accrued expenses and other current liabilities on the Consolidated Balance Sheets.

The effective interest rates for the Notes include the interest on the Notes and amortization of the discount and debt issuance costs.

As of September 30, 2020, the fair value of the Notes, based on Level 2 inputs, was $ 2,115.0 million.

For a description of the fair value hierarchy and the Company's fair value methodologies, including the use of an independent third-party service, see Note 1 “Summary of Significant Accounting Policies” in the Company's Annual Report on Form 10-K for fiscal 2020.

As of December 31, 2020, the fair value of the Notes, based on Level 2 inputs, was $ 2,120.6 million.

For a description of the fair value hierarchy and the Company's fair value methodologies, including the use of an independent third-party pricing service, see Note 1 “Summary of Significant Accounting Policies” in the Company's Annual Report on Form 10-K for fiscal 2020.

Employee Benefit Plans

1 unchanged sentence

Stock-based compensation consists of the following:

• Stock Options.

Stock options are granted to employees at exercise prices equal to the fair market value of the Company's common stock on the dates of grant.

Stock options generally vest ratably over 4 years and have a term of 10 years.

Compensation expense is measured based on the fair value of the stock option on the grant date and recognized on a straight-line basis over the vesting period.

Stock options are forfeited if the employee ceases to be employed by the Company prior to vesting.

The Company determines the fair value of stock options issued using a binomial option-pricing model.

The binomial option-pricing model considers a range of assumptions related to volatility, dividend yield, risk-free interest rate, and employee exercise behavior.

Expected volatilities utilized in the binomial option-pricing model are based on a combination of implied market volatilities, historical volatility of the Company's stock price, and other factors.

Similarly, the dividend yield is based on historical experience and expected future changes.

The risk-free rate is derived from the U.S.

Treasury yield curve in effect at the time of grant.

The binomial option-pricing model also incorporates exercise and forfeiture assumptions based on an analysis of historical data.

The expected life of a stock option grant is derived from the output of the binomial model and represents the period of time that options granted are expected to be outstanding.

• Restricted Stock.

• Time-Based Restricted Stock and Time-Based Restricted Stock Units.

Time-based restricted stock and time-based restricted stock units granted September 1, 2018 and after generally vest ratably over 3 years.

Time-based restricted stock and time-based restricted stock units granted prior to September 1, 2018 are generally subject to a vesting period of 2 years.

Awards are forfeited if the employee ceases to be employed by the Company prior to vesting.

Time-based restricted stock cannot be transferred during the vesting period.

Compensation expense relating to the issuance of time-based restricted stock is measured based on the fair value of the award on the grant date and recognized on a straight-line basis over the vesting period.

Dividends are paid on shares awarded under the time-based restricted stock program.

Time-based restricted stock units are settled in cash and cannot be transferred during the vesting period.

Compensation expense relating to the issuance of time-based restricted stock units is recorded over the vesting period and is initially based on the fair value of the award on the grant date and is subsequently remeasured at each reporting date during the vesting period based on the change in the ADP stock price.

No dividend equivalents are paid on units awarded under the time-based restricted stock unit program.

• Performance-Based Restricted Stock and Performance-Based Restricted Stock Units.

Performance-based restricted stock and performance-based restricted stock units generally vest over a one to three -year performance period and a subsequent service period of up to 38 months.

Under these programs, the Company communicates “target awards” at the beginning of the performance period with possible payouts at the end of the performance period ranging from 0 % to 150 % of the “target awards.” Awards are generally forfeited if the employee ceases to be employed by the Company prior to vesting.

Performance-based restricted stock cannot be transferred during the vesting period.

Compensation expense relating to the issuance of performance-based restricted stock is recognized over the vesting period based on the fair value of the award on the grant date with subsequent adjustments to the number of shares awarded during the performance period based on probable and actual performance against targets.

After the performance period, if the performance targets are achieved, employees are eligible to receive dividends during the remaining vesting period on shares awarded under the performance-based restricted stock program.

Performance-based restricted stock units cannot be transferred and are settled in either cash or stock, depending on the employee's home country.

Compensation expense relating to the issuance of performance-based restricted stock units settled in cash is recognized over the vesting period initially based on the fair value of the award on the grant date with subsequent adjustments to the number of units awarded during the performance period based on probable and actual performance against targets.

In addition, compensation expense is remeasured at each reporting period during the vesting period based on the change in the ADP stock price.

Compensation expense relating to the issuance of performance-based restricted stock units settled in stock is recorded over the vesting period based on the fair value of the award on the grant date with subsequent adjustments to the number of units awarded based on the probable and actual performance against targets.

Dividend equivalents are paid on awards under the performance-based restricted stock unit program.

• Employee Stock Purchase Plan.

The Company offers an employee stock purchase plan that allows eligible employees to purchase shares of common stock at a price equal to 95 % of the market value for the Company's common stock on the last day of the offering period.

This plan has been deemed non-compensatory and, therefore, no compensation expense has been recorded.

The Company's share-based compensation consists of stock options, time-based restricted stock, time-based restricted stock

units, performance-based restricted stock, and performance-based restricted stock units.

The Company also offers an employee

stock purchase plan for eligible employees.

The Company currently utilizes treasury stock to satisfy stock option exercises, issuances under the Company's employee stock purchase plan, and restricted stock awards.

From time to time, the Company may repurchase shares of its common stock under its authorized share repurchase program.

The Company repurchased 1.7 million and 1.9 million shares in the three months ended September 30, 2020 and 2019, respectively.

The Company repurchased 1.6 million and 1.8 million shares in the three months ended December 31, 2020 and 2019, respectively, and repurchased 3.2 million and 3.7 million shares in the six months ended December 31, 2020 and 2019, respectively.

The Company considers several factors in determining when to execute share repurchases, including, among other things, actual and potential acquisition activity, cash balances and cash flows, issuances due to employee benefit plan activity, and market conditions.

The following table represents pre-tax stock-based compensation expense for the three months ended September 30, 2020 and 2019, respectively:

Three Months Ended

September 30,

The following table represents pre-tax stock-based compensation expense for the three and six months ended December 31, 2020 and 2019, respectively:

Three Months Ended Six Months Ended

December 31, December 31,

2020 2019 2020 2019

Operating expenses $ 4.8 $ 3.4 $ 8.4 $ 7.4

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Total stock-based compensation expense $ 47.1 $ 36.2 $ 80.9 $ 73.3

During the three months ended September 30, 2020, the following activity occurred under the Company's existing plans:

Stock Options:

(in thousands) Weighted

Average Price

Options outstanding at July 1, 2020 3,510 $ 126

Options granted 1,153 $ 139

Options exercised ( 156 ) $ 95

Options forfeited/cancelled ( 8 ) $ 144

Options outstanding at September 30, 2020 4,499 $ 130

Time-Based Restricted Stock and Time-Based Restricted Stock Units:

Number of Shares

(in thousands) Number of Units

(in thousands)

Restricted shares/units outstanding at July 1, 2020 905 180

Restricted shares/units granted 636 103

Restricted shares/units vested ( 340 ) ( 73 )

Restricted shares/units forfeited ( 9 ) ( 1 )

Restricted shares/units outstanding at September 30, 2020 1,192 209

Performance-Based Restricted Stock and Performance-Based Restricted Stock Units:

Number of Shares

(in thousands) Number of Units

(in thousands)

Restricted shares/units outstanding at July 1, 2020 179 851

Restricted shares/units granted 156 167

Restricted shares/units vested ( 70 ) ( 279 )

Restricted shares/units forfeited ( 2 ) ( 5 )

Restricted shares/units outstanding at September 30, 2020 263 734

The fair value for stock options granted was estimated at the date of grant using the following assumptions:

Three Months Ended

September 30,

Risk-free interest rate 0.1 % 1.4 %

Dividend yield 2.6 % 1.9 %

Weighted average volatility factor 25.8 % 19.3 %

Weighted average expected life (in years) 5.4 5.4

Weighted average fair value (in dollars) $ 21.66 $ 24.40

The methods and assumptions used in the determination of the fair value of stock-based awards are consistent with those

described in the Company's Annual Report on Form 10-K for fiscal 2020.

See the Company's Annual Report on Form 10-K for fiscal 2020 for a detailed description of the Company's stock-based compensation awards and employee stock purchase plan, including information related to vesting terms, service and performance conditions, payout percentages, and process for estimating the fair value of stock options granted.

Pension Plans

The components of net pension income were as follows:

Three Months Ended

September 30,

Three Months Ended Six Months Ended

December 31, December 31,

2020 2019 2020 2019

Service cost – benefits earned during the period $ 1.2 $ 14.9 $ 2.4 $ 29.9

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Settlement charges and special termination benefits 2.9 — 5.8 ( 5.1 )

Net pension income $ ( 11.1 ) $ ( 2.7 )

The effective tax rate for the three months ended September 30, 2020 and 2019 was 21.3 % and 21.2 %, respectively.

The increase in the effective tax rate is primarily due to a decrease in the excess tax benefit on stock-based compensation partially offset by favorable adjustments to prior year tax liabilities in the three months ended September 30, 2020.

Net pension (income)/expense $ ( 11.0 ) $ 2.3 $ ( 22.0 ) $ ( 0.4 )

The effective tax rate for the three months ended December 31, 2020 and 2019 was 22.2 % and 22.0 %, respectively.

The increase in the effective tax rate is primarily due to the benefit from a valuation allowance release related to foreign tax credit carryforwards in the three months ended December 31, 2019, partially offset by the benefits from a foreign tax election in the three months ended December 31, 2020.

The effective tax rate for the six months ended December 31, 2020 and 2019 was 21.8 % and 21.6 %, respectively.

The increase in the effective tax rate is primarily due to the benefit from a valuation allowance release related to foreign tax credits carryforwards in the six months ended December 31, 2019 and a decrease in the excess tax benefit on stock-based compensation partially offset by favorable adjustments to prior year tax liabilities and the benefits from a foreign tax election in the six months ended December 31, 2020.

Commitments and Contingencies

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In addition, similar potential class action complaints have been filed in Illinois state courts against ADP and/or certain of its clients with respect to the collection, use and storage of biometric data of the employees of these clients.

In June 2020, the Company reached a settlement of all outstanding claims against ADP for $ 25.0 million, subject to the court's preliminary approval.

The Company does not expect that any of the remaining cases against ADP's clients will result in any material liabilities to the Company.

In June 2020, the Company reached a settlement of all outstanding claims against it for $ 25.0 million, subject to the court's final approval.

The Company does not expect that any of the remaining cases against its clients will result in any material liabilities to the Company.

In May 2020, two potential class action complaints were filed against ADP, TotalSource and related defendants in the U.S.

District Court, District of New Jersey.

The complaints assert violations of the Employee Retirement Income Security Act of 1974 (“ERISA”) in connection with the ADP TotalSource Retirement Savings Plan’s fiduciary administrative and investment decision-making.

The complaints assert violations of the Employee Retirement Income Security Act of

1974 (“ERISA”) in connection with the ADP TotalSource Retirement Savings Plan’s fiduciary administrative and investment decision-making.

The complaints seek statutory and other unspecified monetary damages, injunctive relief and attorney’s fees.

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Three Months Ended

September 30, 2020

December 31, 2020

Common Stock Capital in Excess of Par Value Retained Earnings Treasury Stock AOCI Total

Balance at June 30, 2020 $ 63.9 $ 1,333.8 $ 18,436.3 $ ( 14,067.0 ) $ ( 14.8 ) $ 5,752.2

Balance at September 30, 2020 $ 63.9 $ 1,348.4 $ 18,644.7 $ ( 14,264.0 ) $ 15.9 $ 5,808.9

Net earnings — — 647.5 — — 647.5

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— — ( 398.6 ) — — ( 398.6 )

Balance at September 30, 2020 $ 63.9 $ 1,348.4 $ 18,644.7 $ ( 14,264.0 ) $ 15.9 $ 5,808.9

Balance at December 31, 2020 $ 63.9 $ 1,407.6 $ 18,893.6 $ ( 14,505.4 ) $ 40.3 $ 5,900.0

Three Months Ended

September 30, 2019

December 31, 2019

Common Stock Capital in Excess of Par Value Retained Earnings Treasury Stock AOCI Total

Balance at September 30, 2019 $ 63.9 $ 1,213.7 $ 17,729.6 $ ( 13,412.6 ) $ ( 233.9 ) $ 5,360.7

Net earnings — — 651.6 — — 651.6

Other comprehensive income — — — — 2.7 2.7

Stock-based compensation expense — 31.3 — — — 31.3

Issuances relating to stock compensation plans — 8.7 — 14.5 — 23.2

Treasury stock acquired ( 1.8 million shares repurchased)

— — — ( 311.5 ) — ( 311.5 )

Dividends declared ($ 0.91 per share)

— — ( 393.6 ) — — ( 393.6 )

Balance at December 31, 2019 $ 63.9 $ 1,253.7 $ 17,987.6 $ ( 13,709.6 ) $ ( 231.2 ) $ 5,364.4

Six Months Ended

December 31, 2020

Common Stock Capital in Excess of Par Value Retained Earnings Treasury Stock AOCI Total

Balance at June 30, 2020 $ 63.9 $ 1,333.8 $ 18,436.3 $ ( 14,067.0 ) $ ( 14.8 ) $ 5,752.2

7 unchanged sentences

— — ( 792.3 ) — — ( 792.3 )

Balance at December 31, 2020 $ 63.9 $ 1,407.6 $ 18,893.6 $ ( 14,505.4 ) $ 40.3 $ 5,900.0

Six Months Ended

December 31, 2019

Common Stock Capital in Excess of Par Value Retained Earnings Treasury Stock AOCI Total

Balance at June 30, 2019 $ 63.9 $ 1,183.2 $ 17,500.6 $ ( 13,090.5 ) $ ( 257.3 ) $ 5,399.9

Net earnings — — 1,234.0 — — 1,234.0

Other comprehensive income — — — — 26.1 26.1

Stock-based compensation expense — 67.3 — — — 67.3

Issuances relating to stock compensation plans — 3.2 — 84.9 — 88.1

Treasury stock acquired ( 3.7 million shares repurchased)

— — — ( 704.0 ) — ( 704.0 )

Dividends declared ($ 1.70 per share)

— — ( 740.2 ) — — ( 740.2 )

Other — — ( 6.8 ) — — ( 6.8 )

Balance at September 30, 2019 $ 63.9 $ 1,213.7 $ 17,729.6 $ ( 13,412.6 ) $ ( 233.9 ) $ 5,360.7

Balance at December 31, 2019 $ 63.9 $ 1,253.7 $ 17,987.6 $ ( 13,709.6 ) $ ( 231.2 ) $ 5,364.4

Reclassifications out of Accumulated Other Comprehensive Income (“AOCI”)

1 unchanged sentence

Three Months Ended

September 30, 2020

December 31, 2020

Currency Translation Adjustment Net Gains/Losses on Available-for-sale Securities Cash Flow Hedging Activities Pension Liability Accumulated Other Comprehensive (Loss) /Income

Balance at June 30, 2020 $ ( 322.2 ) $ 680.4 $ ( 30.3 ) $ ( 342.7 ) $ ( 14.8 )

Balance at September 30, 2020 $ ( 271.8 ) $ 661.1 $ ( 32.2 ) $ ( 341.2 ) $ 15.9

Other comprehensive (loss)/income before reclassification adjustments 61.9 ( 44.1 ) — — 17.8

2 unchanged sentences

Tax effect — 1.7 ( 0.4 ) ( 0.6 ) 0.7

Balance at September 30, 2020 $ ( 271.8 ) $ 661.1 $ ( 32.2 ) $ ( 341.2 ) $ 15.9

Balance at December 31, 2020 $ ( 209.9 ) $ 621.0 $ ( 31.5 ) $ ( 339.3 ) $ 40.3

Three Months Ended

September 30, 2019

Currency Translation Adjustment Net Gains/Losses on Available-for-sale Securities Pension Liability Accumulated Other Comprehensive (Loss) /Income

December 31, 2019

Currency Translation Adjustment Net Gains/Losses on Available-for-sale Securities Cash Flow Hedging Activities Pension Liability Accumulated Other Comprehensive (Loss) /Income

Balance at September 30, 2019 $ ( 318.1 ) $ 298.1 $ — $ ( 213.9 ) $ ( 233.9 )

Other comprehensive (loss)/income before reclassification adjustments 34.3 ( 35.5 ) 0.7 — ( 0.5 )

Tax effect — 7.5 ( 0.2 ) — 7.3

Reclassification adjustments to net earnings — ( 7.1 ) (A) — 1.9 (B) ( 5.2 )

Tax effect — 1.6 — ( 0.5 ) 1.1

Balance at December 31, 2019 $ ( 283.8 ) $ 264.6 $ 0.5 $ ( 212.5 ) $ ( 231.2 )

Six Months Ended

December 31, 2020

Currency Translation Adjustment Net Gains/Losses on Available-for-sale Securities Cash Flow Hedging Activities Pension Liability Accumulated Other Comprehensive (Loss) /Income

Balance at June 30, 2020 $ ( 322.2 ) $ 680.4 $ ( 30.3 ) $ ( 342.7 ) $ ( 14.8 )

1 unchanged sentence

Tax effect — 15.5 0.8 — 16.3

Reclassification adjustments to net earnings — ( 8.0 ) (A) 1.7 (C) 5.0 (B) ( 1.3 )

Tax effect — 1.8 ( 0.4 ) ( 1.6 ) ( 0.2 )

Balance at December 31, 2020 $ ( 209.9 ) $ 621.0 $ ( 31.5 ) $ ( 339.3 ) $ 40.3

Six Months Ended

December 31, 2019

Currency Translation Adjustment Net Gains/Losses on Available-for-sale Securities Cash Flow Hedging Activities Pension Liability Accumulated Other Comprehensive (Loss) /Income

Balance at June 30, 2019 $ ( 269.2 ) $ 224.6 $ — $ ( 212.7 ) $ ( 257.3 )

Other comprehensive (loss)/income before reclassification adjustments ( 14.6 ) 60.6 0.7 — 46.7

Tax effect — ( 13.3 ) ( 0.2 ) — ( 13.5 )

Reclassification adjustments to net earnings — ( 9.4 ) (A) — 0.2 (B) ( 9.2 )

Tax effect — 2.1 — — 2.1

Balance at September 30, 2019 $ ( 318.1 ) $ 298.1 $ ( 213.9 ) $ ( 233.9 )

Balance at December 31, 2019 $ ( 283.8 ) $ 264.6 $ 0.5 $ ( 212.5 ) $ ( 231.2 )

(A) Reclassification adjustments out of AOCI are included within Other (income)/expense, net, on the Statements of Consolidated Earnings.

(B) Reclassification adjustments out of AOCI are included in net pension income (see Note 11).

(C) Reclassification adjustments out of AOCI are included in Interest expense on the Statements of Consolidated Earnings.

(B) Reclassification adjustments out of AOCI are included in net pension (income)/expense (see Note 11).

(C) Reclassification adjustments out of AOCI are included in Interest expense on the Statements of Consolidated Earnings (see Note 10 ) .

Interim Financial Data by Segment

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Segment Results:

Three Months Ended

September 30,

Three Months Ended Six Months Ended

December 31, December 31,

2020 2019 2020 2019

Employer Services $ 2,510.6 $ 2,537.5 $ 4,887.4 $ 4,978.9

3 unchanged sentences

Earnings before Income Taxes

Three Months Ended

September 30,

Three Months Ended Six Months Ended

December 31, December 31,

2020 2019 2020 2019

Employer Services $ 758.6 $ 766.3 $ 1,447.8 $ 1,445.7

3 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements